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Payment and Electronic Money Institution Insolvency (Amendment) Regulations 2023

Volume 834: debated on Wednesday 6 December 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Payment and Electronic Money Institution Insolvency (Amendment) Regulations 2023.

My Lords, these draft regulations will expand the application of the existing insolvency arrangements for electronic money and payment institutions so that they apply to firms in Northern Ireland and Scottish limited liability partnerships as they already do in England and Wales, as well as for companies in Scotland.

The payment and e-money sectors have expanded rapidly over the last decade, with payment and e-money institutions now holding more than £17 billion of funds belonging to UK consumers. As the sectors have grown, the Government became concerned that the application of standard insolvency procedures to the failure of these firms was leading to negative outcomes for customers. In particular, administration cases involving these types of firms were taking years to resolve, with customers left without access to their money for prolonged periods and receiving reduced money as a result of high distribution costs.

To manage these risks, the Government legislated in 2021 for a special administration regime to provide for the prompt return of client assets should such a firm fail. This regime was delivered through the Payment and Electronic Money Institution Insolvency Regulations 2021 and the accompanying rules. These regulations established the special administration regime in England and Wales, and for companies in Scotland. This regime created special administration objectives that an administrator will have to follow when conducting an administration of a payment or electronic money institution.

The key provisions of this regime include: first, bespoke objectives for an administrator to ensure the return of customer funds as soon as reasonably practicable, to engage with the relevant authorities and to either rescue or wind up the institution in the best interests of creditors; secondly, continuity of supply provisions that will allow an administrator to keep the firm’s key functions operational for customers; thirdly, provisions to ease the transfer of business processes such that a new firm can take on the incumbent’s business and provide continuity for customers; and, finally, bar date provisions to allow the administrator to set a deadline for consumers to claim and thus enable an earlier distribution of customer funds.

The Government originally consulted on the special administration regime from December 2020 to January 2021. This included not only public consultation but pre and post-consultation meetings with industry groups, including the Banking Liaison Panel, as well as extensive work with the FCA. During the consultation process, most respondents expressed support for the proposals and many provided detailed and useful comments which enabled the refinement of policy. For example, the Government introduced additional steps within the special administration regime rules to require administrators to provide a reasonable notice period before a bar date comes into effect. This will allow time for administrators to communicate bar dates to customers and for customers to make claims.

In responding to the original consultation, the Government confirmed their intention eventually to extend the regime to Northern Ireland and to limited liability partnerships in Scotland, but that this would be to a different timetable, reflecting further work that was needed given differences in insolvency law. The Government therefore subsequently consulted extensively with the Scottish and Northern Irish devolved Administrations to produce the regulations being debated here today.

As noted, this statutory instrument is required to ensure that the regime can effectively apply to Scottish limited liability partnerships and to firms in Northern Ireland, ensuring that the regime applies effectively across the whole of the United Kingdom. For example, these regulations ensure that the relevant provisions of the Insolvency (Northern Ireland) Order 1989 apply to the payment and electronic money special administration regime, as they would to any other insolvency proceedings for Northern Irish firms. This mirrors equivalent provisions which ensure that the relevant provisions in the Insolvency Act 1986 apply in England and Wales. This includes provisions around the duties of officers and the powers of the liquidator.

These regulations do not apply the insolvency procedure to Scottish partnerships, as they are sequestrated under the Bankruptcy (Scotland) Act, which is a devolved matter for the Scottish Government. In addition, Scottish partnerships, apart from limited liability partnerships formed in Scotland, do not currently enter administration and would not be within the scope of the regime.

In conclusion, by expanding the application of these regulations to the relevant firms in Northern Ireland and to Scottish limited liability partnerships, these regulations will ensure that we have robust arrangements to manage the potential insolvency of payments and electronic money firms throughout the UK. I beg to move.

My Lords, this instrument seems to make good sense and we certainly have no intention of opposing it. I have just three questions. First, I understand that it was always anticipated that this regulation would stretch over Northern Ireland and Scotland as well as England and Wales, so it seems very strange that the consultations for Scotland and Northern Ireland were not done in parallel with the consultations for England so that, when the legislation came in, the relevant instruments could all flow immediately, rather than creating a two-year hiatus. Is there any particular reason why that procedure was not followed? It would seem to be the more obvious route.

Secondly, the Explanatory Memorandum makes it clear that there was extensive discussion with the relevant bodies in Northern Ireland and Scotland, and the Minister basically said the same. Was there expected to be any formal approval by the devolved Governments, or was that not relevant in this instance? Can the Minister clarify the position of the devolved authorities in this? From the way she described it, it sounds as though there has been no tension or opposition, but it would be helpful to know whether I have misread that.

My last question is a more fundamental one to do with the hard bar. It is obviously critical to have an efficient and effective insolvency process, and I fully accept that the Government are working to frame that. When I was involved with the transition out of Libor, or dealing with dormant assents, it rapidly became evident that it is very hard to identify anything close to 100% of the relevant claimants. Organisations change their names, they are acquired or sold, there are inheritances—all kinds of actions cloud and obscure relevant ownership and, therefore, relevant claims.

In the two instances that I cited, Libor and dormant assets, a provision was made to ensure that people who appear past the point where the process has fundamentally changed do not lose out because they were ignorant. Some will say that most people were overwhelmingly in support of this in the consultation, but the kind of people who do not know that they have a claim are also probably the kind of people who do not reply to a consultation. The experience with dormant assets and Libor has shown that there is a substantial body of people and, usually, small companies who have a genuine legal claim of some sort. I am interested to know whether any thought was given to making provision for that particular group, which could be excluded by the establishment of a hard bar. I have no idea what the legal responsibilities of the administrators are if a claim is made after a hard bar has been established—whether the claimant loses no matter the basis of their claim. I would like to understand that a bit better.

My Lords, we also support these regulations. I would like to ask the Minister a couple of questions. First, on how the FCA’s significantly expanded remit will be delivered in practice, can she set out what the Government are doing to ensure the FCA’s greater powers are accompanied by greater accountability? Can she also tell us what steps the Government are taking to ensure that the additional FCA requirements on payment firms and EMIs are proportionate, and explain how the Government will ensure that these requirements do not hamper innovation in the UK’s payment sector?

Secondly, as is often the case with financial services regulation, there seems to have been a significant gap between the consultation, which took place in December 2020 and January 2021—three years ago—and the statutory instrument being brought forward. Can the Minister tell us the reason for this delay?

Finally, I note there is a requirement for this new regime to be evaluated after two years, with a decision then made on whether the regulations should continue to have effect. Can the Minister set out the criteria by which the regime will be evaluated? I thank her in advance for her answers to these questions.

My Lords, I can hear much flapping of papers behind me, so I have no doubt that I will not be able to answer all the questions in full, but I will do my best. I am grateful to the noble Lord, Lord Livermore, for giving me advance sight of some of his questions, which was very helpful. The noble Baroness, Lady Kramer, mentioned that she might ask me a few questions. None of them were difficult—well, one of them was a little difficult, but we will give it a go.

I thank all noble Lords for their consideration of this draft instrument. It is all about taking an established regime and ensuring that it operates everywhere that it should across the United Kingdom by applying to all organisations in Northern Ireland and to limited liability partnerships in Scotland.

Both noble Lords mentioned the timing and why the Government were unable to bring forward all the regulations at the same time. We took the opportunity to bring through the England and Wales regime before the regulations being debated today because it was slightly easier to do so and we wanted to get the regime in place as soon as possible, having done the consultation. There are some quite significant differences in insolvency law. We therefore took a little extra time carefully to consider the legislation before applying this to Scotland and Northern Ireland. In doing so, we worked extensively with the devolved Administrations in both those areas. There was no sort of tension or opposition, and the rules underpinning this regime will have to be set out by those Administrations in due course anyway.

Herein is the slightly tricker question from the noble Baroness, Lady Kramer, which is her “hard bar” question. I will certainly write. One observation I have about these sorts of payment systems is that consumers tend to be much more actively engaged in them. I would have thought it would be slightly easier to get in contact with them because it is a much more immediate system. However, I will definitely write and set out exactly what we are doing to achieve the balance that she rightly set out. It is not our intention to cut anybody off; it is our intention to get money to consumers as soon as possible because, as we know, time costs money and, unfortunately, delays mean that consumers sometimes get back less than they would otherwise.

Turning to the points raised by the noble Lord, Lord Livermore, about the FCA’s greater powers, accompanied by greater accountability, these regulations directly affect only firms that have entered the insolvency process. They have no effect on firms in normal circumstances. It is also worth stressing that the special administration regime is ultimately a process led by an insolvency practitioner and administrator, not by the FCA. However, the FCA does have a role to play in the regime, including a power to direct an insolvency practitioner, but this power can be used only subject to a number of objectives being met.

More broadly, the Government are committed to the operational independence of the financial services regulator, but increased responsibility for the regulators must be balanced with clear accountability, appropriate democratic input and transparent oversight. I am sure the noble Lord is aware that during the passage of the Financial Services and Markets Act 2023, we included a package of measures to increase the accountability of the regulators, including the FCA, to Parliament when exercising their regulatory powers.

On the proportionality of the FCA requirements, the Financial Services and Markets Act 2000 requires the regulators to take into account eight regulatory principles when discharging their functions, including making rules. The second of these is the principle that restrictions should be proportionate to the benefits that are expected from the imposition of that restriction.

The noble Lord made a good point about whether the requirement would hamper innovation. Clearly, this is an area where innovation has been significant in recent times. The payments are essential to the UK economy but are also a major source of the UK’s competitive growth, at the heart of our financial services sector. In July, the Government commissioned an independent review into the future of payments and specifically asked how to catalyse innovation in UK payment systems.

The regulations being discussed today are all about protecting consumers. Our view is that they will strengthen confidence in the sector by improving customer and market outcomes. In addition to the independent review, the Financial Services and Markets Act 2023 includes a new secondary objective for the FCA to facilitate growth and competitiveness. The Government are taking this through across all sectors to achieve that balance between growth and competitiveness and effective and robust regulation.

I think I may have covered the gap between the consultation and this SI. It is all about the differences in law and just taking the opportunity to bring it in as soon as we could, at least for England and Wales. We brought that in during 2021, which is not bad after a consultation which ended in January 2021, so that is a minor pat on the back. I accept that we would have loved to have brought it in at the same time, but a significant amount of additional work needed to happen.

On the review of the regulations and the criteria to evaluate them, under the Banking Act the Treasury is required to conduct a review of this regime. This is due for completion in 2025 and will be an independent review covering whether the regime is meeting insolvency regulation objectives and whether the regulations should continue to have effect. As ever, once completed a copy of the review will be laid before Parliament. We will set out further details of the review in due course.

Motion agreed.

Committee adjourned at 5.15 pm.